Choice "b" is correct. When a corporation makes multiple distributions during
the taxable year, current E&P is first allocated to each distribution on a
pro rata basis; then, accumulated E&P is applied in chronological order
beginning with the earliest distribution. In this example, where there are two
distributions made by Bridge, the current and accumulated E&P are allocated
as follows: March distribution | $20,000 | Current E&P − $20,000 (March distribution) / $40,000 (total
distributions) × $10,000 (Current E&P) = Amount out of Current
E&P | 5,000 | Accumulated E&P = allocate first come first serve =
chronological until either Acc E&P is used up or entire distribution is
dividend. Here $15,000 Accumulated E&P = $15,000 remaining distribution;
thus use $0 remaining in Accumulated E&P | 15,000 | Entire distribution is a dividend | 20,000 | July distribution | 20,000 | Current E&P − $20,000 (July distribution)/$40,000 (total distributions) ×
$10,000 (Current E&P) = Amount out of Current E&P | 5,000 | Accumulated E&P = all used in March distribution = | 0 | Dividend amount | 5,000 |
Choices "c", "a", and "d" are incorrect per the above explanation.
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